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1.

Allocate costs between cost of goods sold and


inventories for internal and external profit
reporting
2.Provide relevant information to help managers make
better decisions;
3.Provide information for planning, control and
performance measurement.
Limitations of Financial Accounting

It does not provide detailed cost information for


different departments, processes, products, jobs,
different services and functions.
It does not set up a proper system of controlling
materials, supplies.
It is difficult to know the behaviour of costs in financial
accounting as expenses are not classified into fixed
and variable, direct and indirect costs.
It does not proved cost data to determine the price of
the product being manufactured or the service being
rendered to the consumers.
It does not provide necessary information to
management in taking important decisions about
expansion of business, dropping of a product line,
alternative method of production, buy or make etc.
Financial Accounting Vs. Cost
Accounting
A firm manufactures three products A, B and
C whose costs and revenue figures are given
below:
product A Product B Product C
Total
Materials 8000 7000 8000 23000

Labour 5000 6000 4000 15000


Other
Expenses 3000 4000 3000 10000
Sales 20000 21000 12000 53000
Under Financial
Accounting
Rs.
Materials 23000
Wages 15000
Other expenes 10000
Total cost 48000
Sales 53000
Profit 5000
Under Cost Accounting
product A Product B Product C
Total
Material 8000 7000 8000 23000
Wages 5000 6000 4000 15000
Other exp. 3000 4000 3000 10000
Total cost 16000 17000 15000 48000
Sales 20000 21000 12000 53000
Profit(loss) 4000 4000 (3000) 5000
Cost Accountancy
Chartered Institute of Management Accountants,
London(CIMA) defines Cost Accountancy as “ the
application of costing and cost accounting
principles, methods and techniques to the
science, art and practice of cost control and the
ascertainment of profitability as well as
presentation of information for the purpose of
managerial decision making”
Costing may be defined as “the techniques and
process of ascertaining costs”
Cost may be defined as (i) the amount of
expenditure (actual or notional) incurred on or
attributable to a given thing; or (ii) to ascertain
the cost of a given thing.
Assignment -1
Lily Shultz is a junior majoring in hotel and
restaurant management. She wants to work for a
large hotel chain with the goal of eventually
managing a hotel. She is considering the
possibility of taking a course in either financial
accounting or cost management. Before choosing,
however she has asked your to provide her with
some information about the advantages that each
course offers.
Required:
Prepare a letter advising Lily about the differences
and similarities between financial accounting and
cost management. Describe the advantages each
might offer the manager of a hotel.
Financial Accounting and
Cost Management
information system
 Classify each of the following actions as either being associated
with the financial accounting information system(FS) or the cost
management information system:
 Determining the future cash flows of a public corporation
 Filing a corporate income tax report
 Determining the cost of a product
 Issuing annual financial statements
 Reducing costs by improving quality
 Preparing a performance report that compares actual costs with
the budgeted costs.
 Preparing financial statement that conform to GAAP
 Determining the cost of a customer
 Using cost information to decide whether to keep of drop or
product
 Using future expected earnings to estimate the price of a share of
common stock
 Using cost information to decide whether to make or buy a
component.
Information for planning, controlling,
continuous improvement and Decision
making
The cost and management accountant is
responsible for generating financial
information required by the firm for internal
and external reporting. This involves
responsibility for collecting, processing and
reporting information that will help
management in their :
Planning
Controlling
Continuous improvement
Decision Making
Flexibility of the cost
information system
A member of the board of directors for Stillwater’s
Mission of Hope a non profit shelter for the
homeless, asked his accountant how to value the
building used as the shelter. In other words, what
did it cost?
The accountant’s answer was: why do you
want to know? If you need to know the value for
insurance purposes– to determine how much
insurance to buy—then perhaps replacement cost
would be the answer. If you are trying to set a
price to sell the building (and build another
elsewhere), then current market value of the real
estate would be the answer. If you need the cost
for the balance sheet, then historical cost is
Cost Centre
Cost centre is a location, person or item of
equipment for which cost may be ascertained
and used for the purpose of cost control. In
other words any unit of the organisation to
which cost can be separately attributed is
called a cost centre.
Types of cost centres:
Personal cost centre: person or group of
persons
Impersonal cost centre:location or item of
equipment, department, a machine
 Production cost centre: production departments
Classification of cost
 On the basis of nature:
 Material
 Labour
 Overhead or expenses
 On the basis of functions:
 Production cost
 Administration cost
 Selling cost
 Distribution cost
 Research and Development cost
 On the basis of behaviour:
 Fixed cost
 Variable cost
 Mixed or Semi-Variable or Semi-Fixed cost
On the basis of Management
Decision Making
Marginal Cost
Differential Cost
Opportunity Cost
Imputed Cost
Sunk Cost
Relevant Cost
Irrelevant Cost
Explicit Cost
Implicit Cost
Avoidable cost
Unavoidable Cost
Degree of Traceability
Direct cost
Indirect Cost

Association with the product


Product Cost
Period Cost
Basic cost terms:
 Following are the descriptions of costs for a small-town café
(column A) and cost types (column B). The cost object is
each meal served.
A– Costs B—Cost Types
3. Cost of part-time workers(seasonal a. Variable
cost
fluctuations in breakfast and lunch trade) b. Semi-
variable
5. Rent of the café building c. Fixed cost
6. Cost of full-time workers
7. Cost of utilities (telephone, gas, electric)
8. Cost of a leased gas-powered grill
9. Cost of cooking ingredients
Marginal Cost
The increase in the total cost due to the
production of one additional unit in the total
output is called the marginal cost. It comes
basically due to the variable component of the
cost of production or sales.
Differential Cost
It is the difference of total cost between two
alternatives. For the production of a particular
product any one of these two machines can
be used:
Machine 1 machine 2 Differential
Cost
Fixed Cost 20000 18000 2000
Opportunity Cost
It is the value of benefit sacrificed for
accepting an alternative course of action. In
other words, it is the benefit lost when one
course of action is selected against the other
course of action. For example, one person has 100
cubic feet wood, which can sold for Rs.50000, but if
furniture is made of it by spending another Rs.30000 then it
can be sold for Rs.100000. Therefore here Rs.50000 is the
opportunity cost (i.e., the loss of benefit from first
alternative if we go for the second alternative.

Imputed Cost
The imputed costs are such hypothetical costs for
which the actual cash outlay does not take place
but for the purpose of decision making it is taken
Sunk Cost
The cost which has taken place in the past
and alternative decision will not affect the
cost, such costs are called sunk or historical
cost. This type of cost cannot be changed by
any decision in future. Examples of sunk costs
are the book values of existing assets, such as
plant and machineries, inventory etc.
Relevant Cost
A relevant cost is that cost which is relevant
for decision making. It is a future cost which
differs under different options or alternatives.
Fixed, variable and Mixed costs
 Adams Ltd. has five manufacturing departments. The
following operating and cost information for the two most
recent months of activities are given below:
May 2005 June 2005
Units produced 10000 10000
Cost in each department
Deptt.A Rs.10000 Rs.10000
Deptt.B 25000 50000
Deptt.C 35000 45000
Deptt.D 18000 64000
Deptt.E 22000 44000
Identify whether the cost in each department is fixed,
variable, or mixed.
Relevant, Differential cost
Jackson Farm Tools has two options for
repairing its office space, which received
extensive wind damage in a recent storm.
option 1 option 2
Cost 1 Rs.8000 Rs. 8000
Cost 2 6420 2500
Cost 3 16000 0
Cost 4 20400 40800
Total cost 50820 51300
Illustrations
Ill.1. Following data has been extracted from the records of
a manufacturing company, whose operations are varying
from month to month:
level of activity Maximum Minimum
machine hours 800000
300000
Manufacturing exp.(Rs. Lakhs) 52 32
Determine the fixed and variable components of
manufacturing overheads and hence compute the total
manufacturing overhead for an activity level of 500000
machine hours.
ILL.2. B&Co. has recorded the following data in the two most
recent periods:
Volume of production(units) 800 1200
Total cost of production (Rs.) 14,600
19,400